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Your documentation describes Prepayments as "taxable". A "prepayment" in the US (assuming accrual basis) is considered a "deposit" for some future work. The deposit is not a taxable event until the "future work" is completely or partially invoiced, when the sales tax is applied to the amount invoiced. The "deposit" (the "prepayment") paid is merely an amount waiting to be applied as a payment against the invoiced work, in full or in part, and is not in itself a taxable transaction - unless the organization is on the cash basis of accounting. Under the current Xero documentation, it would likely result in double taxation if the tax was calculated upon the invoicing for work done AND on the payment for that work.

I am not familiar with taxation in NZ, AUS, or the UK, so I am not saying that I think the tax documentation on prepayments is incorrect in those countries. It is incorrect in the US.

In the US, when a "prepayment" (deposit) is paid in advance of work, cash is debited and a Customer Deposits liability account is created and used to hold the amount owed to those customers until the work is completed and invoiced. At that point (invoicing) the sales tax is calculated on the taxable work / product invoiced, and the total amount of the invoice is debited to AR, the sales tax is credited to tax liability, and the work billed is credited to revenue. Subsequently, the Customer Deposits liability is debited for the amount invoiced and AR is credited. If the deposit paid is not equal to the invoiced amount, the Customer will either owe an additional amount OR be due a refund of the amount of the excess deposit paid.

I believe that Xero needs to correct the Prepayment documentation for the US version of Xero.